ManpowerGroup Inc. — Form 10-Q Summary
Business context and reporting period
Reporting period: three months ended March 31, 2020; filed May 8, 2020. ManpowerGroup provides staffing, interim services, permanent recruitment, talent solutions, consulting, outplacement and related workforce services through geographic segments in the Americas, Southern Europe, Northern Europe and Asia Pacific Middle East (APME).
Results were materially affected by the COVID-19 pandemic, particularly during the final weeks of March, as lockdowns, workplace restrictions, client hiring freezes and early contract terminations reduced demand across major markets.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue from services | $4,619.1 million | $5,044.9 million | Down 8.4%; down 5.9% in constant currency |
| Gross profit | $724.0 million | $804.8 million | Down 10.0% |
| Gross profit margin | 15.7% | 16.0% | Down 30 basis points |
| Operating profit | $37.7 million | $105.5 million | Down 64.2% |
| Operating profit margin | 0.8% | 2.1% | Down 130 basis points |
| Earnings before income taxes | $17.2 million | $93.6 million | Down 81.6% |
| Net earnings | $1.7 million | $53.5 million | Down 96.8% |
| Diluted EPS | $0.03 | $0.88 | Down 96.6% |
| Cash provided by operating activities | $181.0 million | $101.9 million | Increase of $79.1 million |
The effective income tax rate increased to 90.2% from 42.8%, primarily because low pretax earnings, restructuring costs, valuation allowances in certain countries and French business taxes magnified the tax burden.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1,099.5 million at March 31, 2020, compared with $1,025.8 million at December 31, 2019.
- Total assets were $8,676.9 million, down from $9,223.8 million at year-end 2019, primarily reflecting lower accounts receivable and foreign-currency effects.
- Accounts receivable declined to $4,748.5 million from $5,273.1 million; days sales outstanding increased approximately two days from year-end.
- Short-term borrowings and current maturities were $47.8 million; long-term debt was $995.6 million. The principal euro notes mature in September 2022 and June 2026.
- The $600.0 million revolving credit facility had $599.5 million available after $0.5 million of letters of credit. The company reported a net debt-to-EBITDA ratio of 0.48 to 1 and fixed-charge coverage ratio of 4.69 to 1, versus covenant limits of 3.5 to 1 and 1.5 to 1, respectively.
- Additional subsidiary credit lines totaled $326.3 million, of which $269.8 million was unused; based on applicable borrowing limits, $243.5 million was available at March 31, 2020.
- Management stated that existing cash and credit facilities should be sufficient for foreseeable needs and that it expected to remain in compliance with covenants for the next 12 months.
Material changes versus the prior comparable period
- Revenue declines were concentrated in Southern Europe, Northern Europe and APME. Reported revenue decreased 16.2% in France, 8.0% in Italy, 11.0% in Northern Europe and 15.7% in APME.
- Permanent recruitment revenue decreased 13.2% reported and 10.7% in constant currency, adversely affecting the higher-margin business mix.
- Revenue declined 2.0% in the United States, or 4.8% on an organic basis. Talent Solutions and Experis activity provided partial offsets before client hiring freezes intensified in March.
- Selling and administrative expenses declined 1.9% reported but increased 0.6% in constant currency, demonstrating significant expense deleveraging as revenue fell faster than the cost base.
- Operating unit profit margin declined in the Americas to 1.6% from 3.1%, in Southern Europe to 2.7% from 4.1%, and in Northern Europe to negative 1.3% from 0.2%. APME operating unit profit margin remained 2.9%.
- The segment reporting structure was realigned effective January 1, 2020, with Right Management incorporated into the applicable geographic segments; prior-period results were restated.
Guidance, outlook, commentary and unusual items
- The company did not provide a specific full-year or quarterly earnings forecast. Management stated that the timing of lifting government restrictions and resuming economic activity was impossible to predict and that short-term results would be heavily affected.
- Management anticipated a material ongoing decline in permanent recruitment during lockdowns and expected second-quarter results to be heavily affected by COVID-19.
- Cost actions included government unemployment-related benefits, reduced discretionary spending, scaled-back operations and further organizational optimization. Management expected restructuring savings to begin contributing over the following 12 months, with full run-rate savings beginning in the third quarter of 2020.
- Q1 restructuring costs were $48.2 million, versus $39.8 million in Q1 2019. The remaining restructuring reserve was $35.1 million, with most expected to be paid by year-end 2020.
- A $10.2 million pension settlement loss was recorded in interest and other expenses, reducing diluted EPS by approximately $0.11 after tax. The U.S. qualified retirement plan was fully settled during the quarter.
- Foreign currency movements reduced reported revenue by approximately 2.5%, operating profit by approximately 1.5% and diluted EPS by approximately $0.03.
- Goodwill totaled $1,233.1 million. No interim impairment was recorded, but management warned that a sustained deterioration related to COVID-19 could require a material goodwill impairment charge.
- More than 80% of employees were shifted to remote work within approximately 10 days in March. Management stated that April revenue declines were approximately 20% in the United States, 60% in France, 40% in Italy, 20% in the United Kingdom and 35% in Germany; these are preliminary management observations rather than quarterly reported results.
Principal risks and contingencies
- COVID-19 could cause prolonged client closures, hiring freezes, contract terminations, delayed collections, inadequate government relief and continued weakness in labor markets.
- Management noted particular exposure to France, Italy, the United States, the United Kingdom and Germany, and stated that the ultimate effects of the pandemic could be material but could not be predicted reliably.
- Failure to offset revenue declines with cost reductions could further pressure margins, liquidity and operating results.
- Goodwill and other intangible assets may be impaired if operating results and cash flows deteriorate for a sustained period.
- Guarantees and standby letters of credit totaled approximately $823.0 million. Management did not expect significant payments under these arrangements based on their nature and historical experience.
- Aggregate commitments were $2,167.1 million, including debt, operating leases, severance, office closure and other commitments.
Most important facts for investors to verify
- Whether COVID-19-related revenue declines in April and subsequent months stabilized, worsened or recovered as restrictions were lifted.
- Actual second-quarter revenue, gross margin, operating margin and cash flow, including the effectiveness of government wage-support programs.
- Whether restructuring actions generated the expected savings and whether additional restructuring charges were required.
- Collections, allowance for doubtful accounts and customer credit quality as the downturn continued.
- Compliance with debt covenants and availability under revolving and subsidiary credit facilities.
- Potential goodwill impairment, particularly for the Germany reporting unit and other reporting units affected by prolonged weakness.
- The sustainability of Q1 operating cash flow, which benefited materially from the decline in accounts receivable and reduced working-capital requirements.